South Africa: the long road to state-owned pharma manufacturing

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South Africa wants to build state-owned domestic manufacturing capacity to help meet the needs of its healthcare system and reduce reliance on foreign imports. While the idea sounds good on paper, putting it into practice hasn’t been so straightforward, as Elly Earls finds out.

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South Africa is set to follow in China’s footsteps by building state-owned pharma manufacturing capacity to help meet the needs of its healthcare system at a lower cost and with less reliance on foreign imports. It’s been a bumpy road so far, however, with state-sponsored companies failing to find enough investment to transition from procurement roles to full domestic manufacturing. But with the government now giving itself more modest targets, are its goals more likely to become a reality?

Since 2007, when it established pharmaceutical firm Ketlaphela to curb rising medicines prices, reduce reliance on foreign imports, create jobs and improve the security of supply of HIV/AIDS drugs, South Africa’s governing party the African National Congress (ANC)has been playing a key role in the development of the country’s pharmaceutical sector. It is also a shareholder in a venture called the Biovac Institute, which imports vaccines for the Department of Health’s childhood immunisation programme.

"Total dependence on foreign companies makes us vulnerable to supply as well as financial deficits, and the pharmaceutical industry creates the fifth highest importing deficit in the country’s current account," says Vivian Frittelli, CEO of South Africa’s National Association of Pharmaceutical Manufacturers (NAPM). "A country which does not have quality health expectations will also not be able to provide a reasonable life expectancy and viable workforce."

A bumpy road so far

Yet all hasn’t gone entirely to plan. Ketlaphela, which was originally set up as a joint venture between state-owned firm Pelchem (the only fluorochemical company in the southern hemisphere), the Industrial Development Corporation (IDC) and Swiss pharmaceutical manufacturer Lonza, failed to woo investors and was therefore unable to progress from a procurement role to the manufacturing role the state initially had planned for it.

Meanwhile, Biovac has yet to produce vaccines more than a decade after it was formed.

For Dr Etienne van Wyk, healthcare programme manager at Frost & Sullivan Africa, the lack of investor interest in Ketlaphela was largely down to Lonza deciding to pull out of the project in 2013.

"The withdrawal of the Swiss pharmaceutical manufacturer would have sent a very strong message to the market about the viability of this venture," he argues, adding that with the manufacturing of pharmaceuticals you can’t simply take a country perspective, especially for a relatively (in global terms) small market.

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"The need to develop a regional distribution in order to get the volumes high enough is an imperative," van Wyk says "Add API’s to the equation and you most likely have to take an African perspective. The market, most likely, simply did not have confidence that a state-owned company had the capability to make this a success; the risk is just too great for private investors.

"Are you going to be able to compete on price with the expertise and volumes that are generated in Asia? Are you going to pay a premium for these products simply because the enterprise is state owned? Inevitably, how are you going to justify the use of the public enterprise, and who is going to have to bail the enterprise out if things go wrong?"

New direction, but challenges remain

Now, though, the government has decided to move forward in a different – and more realistic – direction, procuring finished goods while it builds manufacturing capacity as well as earmarking a share of state contracts for the company. "I am convinced with the plan we have for Ketlaphela … that we will be seeing a very exciting development within the next year," said Science and Technology Minister Naledi Pandor in May.

However, van Wyk isn’t so sure the short-term will be as exciting as Pandor hopes. "My prediction is that nothing will happen [this year]. The local pharma market is a challenging one and those who have more of a global presence, like Aspen, are the ones who are successful," he notes.

One key short-term challenge, for van Wky, is how to generate economies of scale. "I don’t see how [this can be done], and this will impact heavily on the long term viability," he says.

Another challenge the state is likely to face in the longer term, according to Valter Adão, Deloitte’s healthcare and life science leader in Africa and Njabulo Skhosana, a healthcare strategist for Deloitte Africa, is sourcing enough skilled human resources to make the project work. "The initiative will have to ensure it sources managers and a core workforce that have the enabling skill-set for the venture to succeed," they say.

"This can sometimes prove to be a challenge on the African continent and indeed globally. In South Africa specifically, it has been noted [in a recent Deloitte report titled’The skills gap in manufacturing’] that technology is outpacing the supply of talented workers and the pipeline of talent isn’t deep enough or being developed quickly enough at present," he explains, also noting that, despite this, there is some level of potential in this area.

"In South Africa specifically, it has been noted that technology is outpacing the supply of talented workers."

"One encouraging factor may be that research by the African Society for Laboratory Medicine has also found that, whilst Africa has less than 500 internationally accredited laboratories, 90% of these are based in South Africa. This strengthens South Africa’s position as the most suitable African territory for investment into life sciences."

The final challenge Adão and Skhosana are keen to mention is the current pressure on government finances being experienced in South Africa. "It is important that the venture is one that can sustain itself from a commercial basis and at least breaks even, despite selling goods at a lower price for the public healthcare system," they note.

"There is considerable pressure on the government finances at this point in time -pressure that is likely to remain for the foreseeable future – meaning that continually large investments or subsidies into a loss-making entity may not be welcome and actually prove more costly than procuring from the market."

More investment essential for future success

Ultimately, promises from the government to procure a certain quantity of medicines from Ketlaphela will not alone bring the company up to the international standards and scale required for long-term success, according to van Wyk, Adão and Skhosana. Outside investment will be needed at a later date.

"It is important for initiatives like Ketlaphela to first prove their commercial viability and not depend on government subsidisation to operate. If this can be done then some sort of partnership or investment from outside may prove to be useful – as long as there is a clear and strategic reason behind doing so," Adão and Skhosana remark.

Van Wyk agrees. "Investment in expertise and skills is most likely the greatest need in this regard. Getting access to international distribution channels to generate economies will be an imperative, too, and this will be almost impossible to build as a greenfields operation."

But how to go about it? "The best [idea] would be to provide incentives – financial and other – to local commercial companies to create viable local but export driven manufacturing facilities aimed at regional supply," Frittelli believes.

"We should be reducing red tape and creating the opportunities for South Africa to move into Africa."

"Creating a more attractive investment climate is most likely going to help, but demonstrating success in public entities may also go a long way," van Wyk adds.

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Knowledge Exchange Network (KENX) has announced that their Validation University (Val-U) is returning to Cork, Ireland on 25-27 November, offering hands-on training for the biotech, medical device, pharmaceutical and related industries.